Inchcape plc (LON:INCH) is the topic of conversation when Zeus Capital’s Head of Research Mike Allen caught up with DirectorsTalk for an exclusive interview.
Q1: Inchcape produced their half-year results for the six months ended 30th June 2020, how did H1 look and did you note any key themes in the report?
A1: So, I think in terms of the first half results, we modelled it on a monthly basis to see how the company was fairing during lockdown and coming out of lockdown and we feared they could’ve made a loss in the first half of the year. Indeed, they made a small profit which was better than what we’d anticipated.
The results were six months to the end of June, cash generation in particular surprised us on the upside as well, we saw some very good working capital management there and we think that shows good collaboration with the OEM partners which I think is a healthy sign for the long term.
The group has got just short of £90 million of cash at the period end and liquidity well in excess of £750 million so we think the company is in a very very strong position considering the current circumstances.
Q2: In terms of company strategy, what did you note from the new CEO Duncan Tait’s comments?
A2: Yes, very encouraging. Clearly, this is a distribution-centric model, I think being in distribution, it’s higher margin than retail, it’s more cash generative as well. Returns on capital are very high normally in this type of business so I think that’ll remain core.
He also talked a lot about the OEM’s being integral to that as well which we felt was a healthy sign and in terms of capital allocation, the company has had a very strong and effective capital allocation strategy for some time and that’s, in the main, capital investment, share buybacks, progressive dividend and M&A as well. The good news is they’re committed to all of those over the long term. We haven’t factored anything in just yet for dividends but clearly, that could well be on the agenda, maybe at the beginning of next year.
He also said the balance sheet was M&A ready so if they see good opportunity then they’re in a good position to take up those and clearly, share buybacks may well emerge sooner rather than expected just given this excess cash generation that we’ll see. We don’t see it for this year but what we do know is that the underlying cash that’s generated by the company is normally very strong.
So, we think capital allocation remains intact on a number of different fronts and could well resume next year depending on the environment.
Q3: Has this affected your forecast in anyway?
A3: Well, we pulled our forecast in March during COVID and we’ve decided to reinstate our forecast on the back of the results.
We’ve obviously assumed some ongoing trading disruption but our forecast assume that April was the trough point. We do expect an acceleration in the second half, we do have to caveat that with second waves etc. but our current run rate, all things being equal, we will see a steady recovery in H2.
Looking into 2021, we’re assuming revenue growth of about 15%, again that does depend on global macro factors but the IHS automotive is expecting a 14% bounce back next year and we’re comfortable that the company normally outperforms its key markets and has a good track record of doing so.
Looking into 2022, a bit more of a normalise year, however, we still expect that to be below what they generated in 2019.
The situation is clearly fluid at the moment but the company appears to be on the right track and it obviously does benefit from being globally diversified.
Q4: Finally, what are your thoughts on Inchcape’s valuation?
A4: We’ve looked at it a number of different ways. We’ve done some long term DCF modelling, we’ve looked at the effects of acquisitions in terms of investing £40 million on small acquisitions.
I think on a medium term view, we believe that the valuation could well rebound back in excess of £8 per share. If you look at it on a mid-cycle PE basis i.e. 14 times PE on 2022 earnings, which wouldn’t be fully recovered earnings, you get to about £6.80.
So, we think there’s upside given where current levels are at the moment, this is a business that’s very strong financially and has a unique strategic position with the OEM’s.
